All big U.S. banks but one pass Fed's health test

Emily Stephenson

4 Min Read

WASHINGTON (Reuters) - U.S. big banks have enough capital buffers to withstand a drastic economic downturn, the Federal Reserve said on Thursday, announcing that 29 out of 30 major banks met the minimum hurdle in its annual health check.

The sun rises to the east of the U.S. Federal Reserve building in Washington, July 31, 2013. REUTERS/Jonathan Ernst

All of the big banks except for Zions Bancorp (ZION.O) stayed above the 5 percent requirement for top-tier capital in the latest round of stress tests.

The tests aim to show how banks would weather a financial collapse similar to the 2007-2009 crisis. Banks had to show how they would cope with a halving of the stock market, and the eight largest banks had to weigh the impact of the default of their biggest trading counterparty.

“The annual stress test is one of the Federal Reserve’s most important tools to gauge the resiliency of the financial sector and to help ensure that the largest firms have strong capital positions,” Fed Governor Daniel Tarullo said in a statement.

Stress tests are closely watched by financial markets as a sign of the industry’s health, and also because the Fed can reject banks’ plans to return capital to shareholders if they think the banks are not strong enough to carry them out.

European regulators plan to conduct their own stress tests later this year, following a broad review of the asset quality of banks on the continent.

The Fed will announce on March 26 which banks’ plans to pay dividends or buy back shares were approved.

For the results announced on Thursday, the Fed assumed banks would keep dividends at their current levels and buy back no shares. Regulators tested three different scenarios, the toughest of which assumes stock prices would be cut in half and home prices would plummet.

Over the nine quarters of the testing period, the Fed said total losses at the 30 banks were projected to be $501 billion, including losses across loan portfolios and from a hypothetical global market shock applied to six of the biggest firms.

The group of 30 banks’ aggregate tier 1 common capital ratio, which is composed of shareholder equity and reserves, dipped to 7.6 percent under the toughest stress scenario.

That means banks are stronger than during the financial crisis, when the tier 1 ratio was 5.5 percent at the beginning of 2009, the Fed said. Zions’ tier 1 capital ratio fell to 3.5 percent during the most severe stress scenario, below the minimum.

Zions also failed to meet other risk-based capital benchmarks, which take into account the riskiness of assets.

Zions said last month that it expected to resubmit its capital plan due to the sale of some securities that disproportionately contributed to losses under the toughest stress scenario.

The other 29 banks stayed above the minimum levels. All of the banks met a so-called leverage requirement, which does not incorporate the riskiness of banks’ assets.

This was the first year that Zions and 11 other banks, among which were Comerica (CMA.N) and Discover Financial Services (DFS.N), participated in the full stress test regime.

The other 18 banks, among which were JPMorgan Chase (JPM.N), Citigroup (C.N) and Morgan Stanley (MS.N), participated in previous rounds.